Chaos & Volatility On The Rise

No, that’s not a ‘click bait’ sensationalist title. Things are getting ‘weird’ out there if you’re trying to be polite, and downright 'chaotic' if you're being blunt. Everywhere we look, we see signs that the systems that support us are breaking down.

The economy no longer spins off enough surplus for the elites to take what they consider their share with enough left over for everyone else. So the wealth gap grows unchecked into politically and socially destabilizing levels.

The oceans are rapidly dying off: with corals bleaching, tide pools acidifying, and phytoplankton disappearing. Weather weirdness is now so entrenched that all of the 50, 100 and 500-year events that happen each week are mainly reported on locally and garner little national and international attention.

Financial markets are increasingly volatile and dominated by an unruly universe of computer algorithms that now mainly play against each other, having driven off all the humans.

Politically, we're seeing the former fringes of both parties increasingly come into power as they appeal to increasingly disenfranchised and disappointed electorates.

All of these are signs that the status quo has failed and continues to fail us. But the form of power expressed by our so-called ‘leaders’ today seems nearly incapable of healthy introspection coupled to correct action; preferring instead to do more of the same things that got us into this mess in the first place.

Those of us who can read the signs for what they are, not what we wish or believe them to be, have a special duty to first prepare ourselves for what's coming and then help others. To put on our own oxygen masks first, and then help the others around us.

For a variety of reasons, most of them rooted in archaic evolutionary brain structures, most humans are not well adapted to face change, let alone major change.

And the volatility and chaos that's arising all over the globe is well beyond major change. Therefore it's well beyond the capability of most people respond to effectively -- perhaps even at all.

So it’s up to you, the one reading this, to lead the way by becoming the change you wish to see. If you want to live in a world of abundance and where everyone is at least minimally prepared for an uncertain future, then begin by building up your own 8 Forms Of Capital: financial, living, emotional, social, knowledge, cultural, material and time. [Note: The 8 Forms of Capital are fully explained in this podcast with Ethan Roland as well as covered extensively in our new book, so I won’t re-explain them all here. But the concepts are vitally important, and I encourage you to dig deeper now if you haven’t already]

Market Volatility

Recent market volatility, while pretty far from extreme absolute levels, is remarkably aggressive in terms of its relative swings. The ups and downs are getting more frequent, packed together in a way that's increasingly concerning to astute market observers.

There are many factors at play here that have created a fragile market structure. First, the unchecked rise of the machines (computer algorithms) coupled with severe information asymmetry (the very biggest firms have access to tradeable data that you and I never see) has led to a lamentable abandonment of fundamentals in favor of momentum and trend following.

Second, the central banks have nurtured a very unhealthy market dependence on their words and actions. Indeed, the central banks in Japan, the US and Europe have all shown a severe dislike of falling equity prices, and so routinely trot out a series of officials to make soothing noises every time the broad indexes fall even a few percent.

What are they so afraid of?

Well, for starters, they know full well that the global economy is shaky, at best. Financial markets valuations are so high that you might say they are 'priced for perfection'.

The fear is that if these market ever get rolling to the downside, they'll fall a very long way before finally finding a true bottom. And along that path lies a bevy of failed mega-banks and ruined political careers. So, the status quo has a very strong interest in keeping the financial markets propped up for as long as possible.

However, as mentioned before, these unhealthy market conditions have led to a general retreat by flesh and blood traders leaving only the computers to play financial ping pong with each other. This means trading volumes have fallen and volatility has increased:

'Paralyzing Volatility' Means Trouble for Wall Street Giants

May 6, 2016

There’s plenty of volatility, but what happened to the volume?

From stocks to currencies and bonds, the upswing in turbulence to start the year is chasing all but the bravest traders from financial markets.

Despite the recent rebound in U.S. equities, volume in the S&P 500 Index is down 23 percent. Speculative bets on the direction of currencies have also dropped to the lowest in two years, while average daily trading among dealers in U.S. Treasuries is close to a seven-year low.

Worries about the outlook for the U.S., Europe and China, as well as mixed policy signals from central bankers around the world, have all contributed to what UBS Group AG Chief Executive Officer Sergio Ermotti called a “paralyzing volatility” that’s scaring away clients and caused industry-wide trading revenue to tumble to the lowest since 2009.

Normally, a rise in volatility tends to lead to higher trading activity as traders jump in to bet on the market’s ultimate direction, according to Gulberg. That hasn’t been the case this time. Violent swings across assets have whipsawed just about everyone as concern deepens over the state of the global economy and the effectiveness of negative interest rates and quantitative easing.

At the start of the year, it took just six harrowing weeks for the S&P 500 to lose 11 percent and then a mere five weeks to recoup all the losses. What’s more, it came within months of its August swoon, the first time since 1998 that bull-market investors have suffered two such swings in close succession.

Even after stocks rallied in February, trading has fallen off. U.S. equity volume has averaged 7.2 billion shares a day since the bottom, compared with 9.3 billion shares a day in the first six weeks of the year, data compiled by Bloomberg show. Daily moves in the S&P 500 have also averaged 0.84 percent since August, versus 0.55 percent in the prior two years.

“We’re seeing huge dislocations in markets in this year,” said Atul Lele, the chief investment officer at Deltec International Group. “It isn’t the type of volatility where you see opportunities come out of the woodwork.”

Yes, the so-called “markets” are not really markets anymore. They are the playgrounds of remorseless computer algorithms which can (and regularly do) turn on a dime and run the other direction simply because that’s where all the other programs are running.

Along the way, traditional traders and investors who do important things like analyze earnings and spot fundamental errors have been routinely trampled and they are doing the sensible thing by backing away.

That’s what I did a number of years back once I understood that the playing field was steeply titled and getting more steeply tilted by the day. Wall Street is always something of a rigged casino but now the rigging is extremely unfair and completely obvious.

And it’s not just the little guys that are harmed here, even the biggest players are being smacked around in these brave new “markets.”

Hedge funds are doing terribly

Apr 22, 2016

Pity the hedge fund manager.

The elite, highly compensated men—they’re mostly men—who run money for the world’s wealthy are having a devil of a time finding a way to make decent returns. As an asset class, hedge funds lost 0.4% during the first quarter, according to research firm Eurekahedge.

Hedge fund clients have noticed that they’re not making money. As a result, they’ve yanked roughly $15 billion in assets from hedge funds in the first quarter, the worst stint of redemptions since 2009, during the nadir of the Great Recession.

Even the hedge funds, with nearly $3 trillion under management are not big enough, or well-positioned enough, to figure out what’s going on and make positive returns. This means that you and I stand even less of a chance of gaining access to useful trading information.

The reason for this is contained in this snippet from a FT article on hedge funds:

The [hedge fund] strategy that has been winning the year so far is dictated by computers: systematic hedge funds that surf trends using financial models and algorithms have dominated the lists of the best-performing funds.

Yep – computerized “trend surfing” is the latest hot thing. Of course, to do that, nothing need be known about the underlying reason for the price moves, only being on the right side of those moves. If that sounds like a completely societally useless thing to do, except to the extent it lines the pockets of the people playing the game, that’s because it is.

The idea of capital markets existing to align surplus capital with promising ideas has long since given way to a Wild West casino mentality fully supported and coddled by fearful central banks.

This is a terrible ‘reason’ for markets to exist and shows just how far off the tracks we’ve gotten. The Federal Reserve has a lot to answer for in being the leader of the pack in creating these Frankenmarkets.

At any rate, market volatility is increasing and with it the chance of a market crash also increases. Twitchy, trend surfing computers with microsecond reflexes are not exactly the makings of a resilient market structure.

Weather Volatility

Now I happen to live in New England USA so the idea of weather volatility is something I have to try and become worked up about. Hey, weather has always been somewhat unpredictable and chaotic, right?

But recent events have driven home the idea that we are now experiencing highly unusual weather events that even the most ardent Pollyanna would have a hard time overlooking.

Driving all of this is an extreme spike in atmospheric temperatures itself kicked off by a very pronounced El Niño. Fluid dynamics are notoriously difficult to model but the basic idea is that what are considered stable patterns at one temperature will shift into new patters at a higher or lower temperature.

Think of food coloring dropped in a glass of cold water vs the same dropped in a vessel of hot water the temperature of which is rising. Yes it swirls in both containers, but far faster and in a more wide-ranging way in the hot vessel than the cold.

While it’s thought that the moderating El Nino will also moderate the rapid temperature spike, we can already see some of the effects brought about by a jet stream with unusual patterns. The first is in the tragic story of the forest fires that burned through Fort McMurray, which were stoked by a very unusual jet stream pattern that brought temperatures 30 degrees warmer than normal to the area.

Fort McMurray fires

Unseasonably hot weather in Alberta, Canada, is fueling the worst wildfire disaster in the country’s history. An extreme weather pattern, known as an omega block, is the source of the heat.

An omega block is essentially a stoppage in the atmosphere’s flow in which a sprawling area of high pressure forms. This clog impedes the typical west-to-east progress of storms. The jet stream, along which storms track, is forced to flow around the blockage.

At the heart of the block in Canadian’s western provinces, the air is sinking and much warmer than normal. Such a clog can persist for days until the atmosphere’s flow is able to break it down and flush it out.

Centers of storminess form on both sides of the block, and the resulting jet stream configuration takes on the likeness of the Greek letter omega. In this case, cool and unsettled weather is affecting the eastern Pacific Ocean and eastern North America, including much of the U.S. East Coast.

As the Fort McMurray wildfire rapidly spread Tuesday, temperatures surged to 90 degrees (32 Celsius), shattering the daily record of 82 degrees set May 3, 1945.

More records are likely to fall today. Temperatures are forecast to climb well into the 80s today at Fort McMurray, about 30 degrees warmer than normal.

The videos of the fires in Fort McMurray are quite alarming and many people were caught quite unprepared. While the loss of life has been kept to a minimum by prompt evacuation calls, at last count more than 1,600 homes had been burnt to the ground, with some residential communities practically burned to the ground.

On the other side of the Atlantic another jet stream anomaly brought unseasonably late ice and snow and hard freezes to areas where fruit production and vine growth were already underway ruining the growing season across entire swaths of Europe:

Extreme snowfall and frost damage in Europe

May 3, 2016

In several European countries – such as Austria, Switzerland, Italy, Croatia, Germany, Slovenia, France and Belgium – apples, pears, cherries and grapes were frozen early last week. The snowfall also created challenges with the roofing systems, and occasionally the snow completely ruined things. Snow and cold temperatures are predicted for some places in the coming nights again. NFO, the Dutch fruit growers association, summarised the results per country as follows:

Austria

In the cultivation area in the state of Styria the words ‘complete catastrophe’ have been used. About 80 per cent of the fruit harvest would be destroyed (see photo left of the news report in which firefighters remove snow from hail nets in Gleisdorf, the link is at the bottom of this article and external). During the night from Monday to Tuesday the small fruits had to endure temperatures of 2 to 6 degrees below freezing according to the Landwirtschaftskammer. Initial estimates concerning approximately 2,000 Styrian cultivators indicate €100 million Euro in damages for the fruit sector (without grapes) alone. Councillor Hans Seitinger: “This is truly a unique situation, which has not occurred in the last 50 years.”

Italy

The Italian agricultural organisation Coldiretti also reported that the fruit cultivation suffered damages from the weather circumstances. The increasingly often occurring results of climate change resulted in more than 14 billion Euro of damages to agriculture in the last ten years, according to Coldiretti. Last winter, Italy had the warmest winter in history. This resulted in an early development of crops.

The longer list of country effects shows that fruit and grape production was just hammered making this a lost growing season for those unfortunate farmers.

In my own small corner of the world there may be zero peaches produced by several New England states, mine included, because it dipped to a bud-killing 18 degrees one night and then 19 degrees the next in April. Those are very unusual temperatures courtesy of a late season polar vortex itself courtesy of a wonky jet stream.

So no peaches this year.

Yes, sometimes weather does unusual things. But it is the increasing frequency of such events that makes it increasingly obvious that we had better start planning on them continuing far into the future.

The problem is, we don’t have the slightest clue how to really plan because the new patterns are emergent – they don’t just happen all at once, it’s a process that takes time – and it’s too early to declare anything beyond “change is happening.”

As each decade passes, knowledge of Earth’s past becomes progressively less effective as a guide to the future. Civilization enters a dark age in its practical understanding of our planet.

To comprehend how this could occur, picture yourself in our grandchildren’s time, a century hence. Significant global warming has occurred, as scientists predicted.

Nature’s longstanding, repeatable patterns — relied on for millenniums by humanity to plan everything from infrastructure to agriculture — are no longer so reliable. Cycles that have been largely unwavering during modern human history are disrupted by substantial changes in temperature and precipitation.

As Earth’s warming stabilizes, new patterns begin to appear.At first, they are confusing and hard to identify. Scientists note similarities to Earth’s emergence from the last ice age. These new patterns need many years — sometimes decades or more — to reveal themselves fully, even when monitored with our sophisticated observing systems.

Until then, farmers will struggle to reliably predict new seasonal patterns and regularly plant the wrong crops. Early signs of major drought will go unrecognized, so costly irrigation will be built in the wrong places.Disruptive societal impacts will be widespread.

A ‘dark age’ is simply a time when your prior accumulated knowledge is either lost or is no longer applicable. There’s much groping about as culture realigns itself and finds its new footing.

The new wanderings of the jet stream have brought unseasonable cold to some areas and drought to others. It has blocked storms from some areas and dumped unusual amounts of rain in others.

It’s now common to read of “100 year” events, they seem to happen every month.

These new patterns are noticed somewhere in our animal cores, leading people to report a feeling of anxiety, or that “something is just not right.”

Certainly there’s no shortage of things that might contribute to that sense, but we need to hold open the idea that we remain attuned to the natural world and as that shifts dramatically all around us, we are deeply affected.

Summary

Market volatility is on the increase, as are weather anomalies. Perhaps they're connected in some deeper way that is not obvious. Or perhaps each just represents the logical end stage of a system grotesquely deformed by too much hot money (in one case) and trapped heat (in the other).

If you're waiting for things to become even more deformed before you begin to prepare yourself for a future of disruptions -- don’t. Get started right now. Preparing takes time, money and emotional energy. All of those things tend to evaporate once a crisis really gets rolling along.

This new volatility is now here with us. And that has enormous implications -- some we can plan for, and others we cannot. I can plan on losing peaches now and then but if the rains stop falling, I’m screwed.

In Part 2: How To Prepare For Volatility, we conclude that nobody can predict exactly how or when these changes will manifest. We are entering a new dark age, one marked by an unknowing. We can either acknowledge that reality and begin to act on it today, or we can ignore it and assume we’ll have time to react to circumstances later, along with most other people.

And there's much we can do today -- right now -- that will make a huge positive difference difference in our outcomes should crisis arrive soon. But we need to act soon.

Those who wait will mostly be caught off guard and very disappointed in themselves. It happens all the time -- just ask the residents of Fort McMurray.

Join the discussion

65 Comments

Very much welcome the addition of weather/climate volatility to the discussion. As for a major cause look no further than the horrors unfolding in the Arctic and Greenland. Difficult to read about but Robert Scribbler doing a stellar job covering it, and other climate-related developments.

It is hard not to feel that we are in the process of losing our stable climate system, if we haven't done so already.

I wonder if planting and growing under "hoop" green houses, also called "high tunnels," will catch on with the increased weather stress. Here are some pictures from Rob Shepler's Potter's Ranch facebook page. One size green house is massive. Large enough for fruit trees.

A hoop Green House with a heater running during this last frost.

Building the "high tunnel."

This style of covering is called a "caterpillar" hoop house.

On way to protect low growing crops from frost damage is to have a low tunnel hoop green house built within a high tunnel hoop green house.

Here is a low tunnel.

The instruction manual on how to make these "Quick Hoops" from Johnny's Seeds

I don't fall in the category of "climate change deniers," a term I personally despise. Point of fact, I have witnessed warmer temperatures over decades in my neck of the woods.

I am, however, less of a fan of the way climate science has been managed. Sir Francis Bacon would not have approved, to say the least.

The other phenomenon is that the main stream media will print anyone saying that any event is climate change related, without considering the amount or extent of science behind the pronouncement.

I've wondered about some of the claims and, in honor of Al Bartlett, ran the numbers to the extent possible. There is no data available to the masses, that I have been able to find, regarding fires and floods, but there is data available regarding tornadoes and hurricanes. What I found when looking at major tornadoes and all hurricanes is that the slope of the trend line for both hurricanes and major tornadoes is very slightly negative. Their frequency is declining ever so slightly since tracking began in the US.

So, I personally, am left with the opinion that, the Midwestern United States seems to be warming over an extended period. However, I am not convinced the numbers generated by the science for 100 years hence are reliable. Short of the climate change scientific community excluding members with unshakeable, preconceived notions on the subject, there is no good answer.

Having said all that, here's a scary environmental topic. We talk frequently about water shortage and atmostpheric CO2 levels. Has anyone ever wondered how we are doing regarding atmostpheric oxygen?

IMO, this article is not entirely accurate, and certainly too late to do the readers any good.

It has been obvious for a LONG time now that we have a "3 dollar bill" stock market which TPTB cannot ALLOW to drop even the slightest, for fear of momentum driven nosedive into the abyss. But they are far from just jawboning the market up from any attempted sell-off. They are manipulating derivatives (particularly the VIX) and levering off algos to create short squeezes,--hence the magical reversal of every market sell-off and subsequent "levitation" of the market, without volume.

Put another way, we have an inverted pyramid with a larger body of derivatives driving a smaller body of stocks underneath.

We also have an inverted pyramid with a financial "economy" on top larger than the physical economy underneath. That's why continued attempts to explain the stock market with economic factors is not only futile but laughable.

Instead of RISING volatility (measured by the VIX), I see it being killed off completely! Instead of the stock market crashing, I see it levitating forever (ultimately at the expense of a trashed US dollar, which is part of the plan anyway).

Write an article to refute this thesis, with some specifics (i.e. explaining the mechanics). Now THAT would be an article worth reading!

Write an article to refute this thesis, with some specifics (i.e. explaining the mechanics). Now THAT would be an article worth reading!

I've written and spoken plenty on the topic, with lots of specifics. Try googling these words and you will several pages of tasty results: Martenson market manipulation

In a nutshell, these computers provide a perfect playground for market manipulators, some of which are just short-term operators spiking prices for their own gains, while others are using the momentum ignition parameters to reverse declines and put hard floors at key technical moments.

Who those operators are would probably be revealed if we understood the particulars that underlie the CME's preferred buyer incentive program for central banks...

I agree with your take on the issue Les. We were having a similar conversation yesterday about the fact that the earths climate has always been in change but the cycles cover such a vast time period that we do not really have time to notice much in one lifetime.

But our ability to observe and deduce from scientific investigation tells us it is true IMHO. My personal take on the peak oil climate change issue has been virtually the same since my college days. As M.King Hubbert pointed out, the stored carbon in the earth's crust was created over a several hundred million year period of time when living organisms from the earth were absorbing sunlight and storing carbon into what would become fossil fuels.

So we have now converted about half of the total stored carbon contained in fossil fuels and put the residual heat and carbon (among other things) back into our atmosphere in a couple of hundred years. At the same time we have harvested a good portion of those living conversion units (AKA Trees, plankton and other living things green things) which give oxygen back to the atmosphere.

I wonder if good old mother nature will notice. I'm not sure we are being the change we want to see either!

A more important question to me is what is she going to do about it! I say get ready for massive change .... including our climate.

People like to say that fiat currency is unbacked. That's not true; each dollar of base money (Fed deposits and/or currency) is backed by a dollar of assets - usually sovereign debt. Each dollar of bank deposits is backed (supposedly) by a loan taken out by some hard-working person or company, usually collateralized by property, equipment, oil in the ground, assets of the company, etc. There is ultimately "something real" behind almost every dollar in circulation, though its ultimately only as real as the validity of the accounting.

Now then - if you wanted to back a currency, you could theoretically choose anything. Gold, land, sovereign debt, municipal debt, corporate debt - or you could choose equities.

Would you rather have (let's say) shares in AAPL, or the sovereign debt of Italy? Or Spain? Or Portugal? Or Non-performing loans from Italian banks? Or rotten subprime mortgage-backed securities?

Ultimately, what's wrong with having high quality equities on the balance sheets of our central bank/hedge funds? Say, just the dow 30? As a taxpayer, I'd almost prefer them over sovereign debt.

SNB buying AAPL doesn't sound so foolish when you consider the alternatives. And if we really are in Armstrong's "private wave" where sovereigns end up defaulting right and left leaving bondholders with very little, SNB may have the last laugh.

Of course, price does matter...and ultimately maybe that's the real objection here. "SNB shouldn't own AAPL because its just too expensive."

The thing that gives me pause is that just about every commentator I read says we're going to have a massive crash in equities. Except - its the bond market that's at a 40 year peak. Half of bonds have negative yields. And when everyone is on one side of the boat, usually something else happens. And when bonds blow, where will the big money go to hide? Armstrong says there's only one place: equities.

And isn't SNB buying AAPL instead of sovereign debt evidence of this very phenomenon?

People like to say that fiat currency is unbacked. That's not true; each dollar of base money (Fed deposits and/or currency) is backed by a dollar of assets - usually sovereign debt. Each dollar of bank deposits is backed (supposedly) by a loan taken out by some hard-working person or company, usually collateralized by property, equipment, oil in the ground, assets of the company, etc. There is ultimately "something real" behind almost every dollar in circulation, though its ultimately only as real as the validity of the accounting.

Now then - if you wanted to back a currency, you could theoretically choose anything. Gold, land, sovereign debt, municipal debt, corporate debt - or you could choose equities.

Would you rather have (let's say) shares in AAPL, or the sovereign debt of Italy? Or Spain? Or Portugal? Or Non-performing loans from Italian banks? Or rotten subprime mortgage-backed securities?

Ultimately, what's wrong with having high quality equities on the balance sheets of our central bank/hedge funds? Say, just the dow 30? As a taxpayer, I'd almost prefer them over sovereign debt.

SNB buying AAPL doesn't sound so foolish when you consider the alternatives. And if we really are in Armstrong's "private wave" where sovereigns end up defaulting right and left leaving bondholders with very little, SNB may have the last laugh.

Of course, price does matter...and ultimately maybe that's the real objection here. "SNB shouldn't own AAPL because its just too expensive."

The thing that gives me pause is that just about every commentator I read says we're going to have a massive crash in equities. Except - its the bond market that's at a 40 year peak. Half of bonds have negative yields. And when everyone is on one side of the boat, usually something else happens. And when bonds blow, where will the big money go to hide? Armstrong says there's only one place: equities.

And isn't SNB buying AAPL instead of sovereign debt evidence of this very phenomenon?

Wow! I'm not sure which is more fundamentally flawed: our debt based monetary system or your logic.

Aloha! Greatest growing season ever here in Hawaii. My mango trees are full of fruit! After 18 years here I have never seen such abundance and I do nothing to the trees. No water no fertilizer no pruning! Capt Cook knew ...

I don't think I understand all the intricacies of the financial system, but this, I am sure of: Banks print money out of this air (Not backed dollars), then they back it against some real assets when they lend it. The problem is that not all assets are (easily?) convertible into $$$. and when there are too many $$$ in circulation, then there is hyperinflation. But every $$$ still represent something, although smaller in quantity. It is the lending process that links every $$$ to some assets.

I find it as an examination of the present state of things, about how a slow decline has started. Just a couple of examples woven with your narrative that make perfect sense with your article.

1. It is not a disaster, but it is a sign of the times where the United States, the richest country on the planet, can no longer spend the money for manned space missions. Based on our current budget picture, it would appear Americans paying for manned missions into space is a thing of the past, unless we hitch a ride with someone else.

2. School districts are starting to really cut back budgets. Here in Vermont, Burlington, by far one of the largest districts in the state, has had to lay off something like 20 professional staff in the last few years.

3. I am really frustrated at this point when someone observes weather events which are unquestionably out of the norm, and then respond that it is all part of the natural cycles of the planet, or that climate change is some liberal plot by the government. Arg. Anyway, the climate variability is starting to be an issue for growing seasons, which has always been one of my primary concerns since starting to prep. Been investigating ways to grow food that stays good long into the winter.

Aloha! It is either the current "usual suspects" in government that survives or the People, the Middle Class. The US Fed was created by a Congressional act at the behest of the bankers for obvious reasons so in true corrupt tactics Congress influences the US Fed. Is it in the governments best interest to see the US Fed raise rates when Obama has single handedly created more debt than all other past Presidents combined? Please do not be so naive to think that both sides of the isle differ on debt issuance. History shows both Reps and Dems enjoy creating more debt. Do you think the struggling family in Middle America with $20k on his Visa card wants to see rates go up? Certainly the real estate market doesn't want higher rates.

Only the older Americans who worked hard their entire life and bought into the oft repeated advice of every financial planner since 1950 want rates to go up. These are the fixed income folks who need interest income and dividends to survive. Even pension funds need rates to rise as they too serve the senior citizens of America. Yet who has the US Congress thrown under the bus for decades now? Pretty much anyone they could sucker to vote for them except their "handlers". Here's a novel idea ... why not let government live on less for once? Dump income tax and let each US government agency go on GoFundMe or Kick Starter. Let the US Dept of Defense go on Kick Starter for its next fighter jet. Want a dam in your State ... GoFundMe!

If people knew how corrupt government contract bids are they would want the US government out of the process. Suddenly they would realize prisons, schools, dams and roads would be cheaper by at least 30%, just on the labor side! Right now if you want US government funds in your infrastructure projects you may as well have the Mafia, they'd be easier and cheaper to deal with!

Dropping off some diapers, baby wipes, and underware at Edmonton's airport receiving centre. Place is packed and more is coming in. You can do all the "prepping" you want in this world, but survival will depend on a self sacrificing COMMUNITY. If the Fort Mac fires demonstrate anything, it is this basic fact.

Wow! I'm not sure which is more fundamentally flawed: our debt based monetary system or your logic.

Well gosh, if its so flawed, it should be easy for you to state the reasons why you think its flawed, and then we can have a discussion on the merits of your fact-based criticism.

Unless of course for some reason you're finding it difficult to generate any fact-based criticism...

Debating this topic with you in this forum is fruitless for a variety of reasons.

First, there is a lot of material involved & I don't have the time or energy to layout the counter argument. I'm not one of these people who writes posts nearly 24/7 with posting times of 12:30am, 2:30am, 4am, 9am, 11am, 2pm, 5pm, 8pm, 10pm, 11pm, etc. voraciously advocating for much of the financial status quo. The anti-status quo types generally are the voracious ones. I have a job that is significantly more than full time (for which I am quite thankful for), I have a full family, I like a full night's sleep, and I like to be as active as possible for my health & well being.

Second, I have no interest in debating people with fixed, firm beliefs. I do have an interest in pointing out to others who are less familiar with the financial system that there are differing thoughts out there, especially when I believe fiction is being peddled.

I would refer folks who are interested in learning more about our debt based monetary system to The Crash Course videos which can be clicked on in the upper left part of this web page, many YouTube videos, a Google search, the movie 97% Owned, etc. People should do their own research. One major problem with the world, especially in the U.S., is that people have gotten intellectually lazy & want others to tell them what's going on. This is why our politicians & financial system has gotten away with so much propaganda. I highly recommend everyone try to learn as much as they can doing their own independent research & then arriving at their own conclusions. Isn't this what Dr. Martenson alludes to in this article?

The amusing thing for me is when you label me a supporter of the status quo. I know, I either have to toe the goldbug/Austrian economics/money-printing-shoulda-sent-gold-to-$5000 party line or else I'm a shill for the bankers.

My problem is I'm a non-mainstream-goldbug goldbug. So the mainstream goldbugs get really upset and want to crucify me for coloring outside the mainstream-goldbug lines. One would think the "non-mainstream" thinkers would be more flexible in their thinking, but they really aren't. They just jumped from one inflexible viewpoint (mainstream) to another inflexible viewpoint (goldbug).

Me, I'm still exploring. I have the temerity to ask questions like, "hey, so what's wrong with central banks owning equities?" Its fun to color outside the lines. At least in my world it is. Most teachers don't like it, some bosses don't like it (other bosses really love it - go figure), and you clearly don't like it, but I just can't help it. Its fun.

If your job is inventing new things, it generally works out pretty well.

Banks print money out of this air (Not backed dollars), then they back it against some real assets when they lend it. The problem is that not all assets are (easily?) convertible into $$$. and when there are too many $$$ in circulation, then there is hyperinflation.

Yes! Banks print unbacked money out of thin air, then instantly get it backed by some real assets. (Its nice to have a banking license, isn't it? Its actually a license to print money. Who knew?). I simplified the process, but your version is more correct.

Here's the new piece though.

Neither inflation nor hyperinflation comes from an increase in the quantity of money. Goldbugs will squawk, but I point them to Art Cashin, a contributor at KWN who says, "if I gave you a trillion dollars, and you kept it in the basement, it would not add to inflation at all." Quantity alone doesn't cause inflation. Only spending the money causes inflation.

As far as I can figure it, new bank credit causes inflation because it is (almost always) promptly spent into circulation. If people borrowed money from the bank and kept it under the mattress, that wouldn't be inflationary, but that's not what happens. People borrow money to buy cars, houses - basically, to buy stuff. So the new bank credit automatically has a spending action attached to it. People imagine it's the new money that causes the trouble, but its actually the spending of the new money that does the inflationary heavy lifting. So who cares about this distinction?

Well, we can see this more clearly with government deficit spending. Government deficit spending is very clearly inflationary (I can cook up a million charts to show you this), but the act of deficit spending creates no new bank credit. So what's the inflationary mechanism? Basically what happens is, existing bank credit (sitting in a savings account) is snatched by the government, a bond is given to the saver in exchange, and that snatched money is promptly spent into circulation. Savings that was just sititng there (velocity = 0) was mobilized by the government. No new money is created, but velocity increases, and so does inflation.

Same thing happens if the central bank monetizes the government deficit who then spends it into circulation. Monetized deficits and unmonetized deficits are actually no different in terms of the change in velocity.

And if the savers just suddenly decided to spend their savings, that causes inflation too, without increasing the quantity of money.

Of course, if people lose confidence in the money (savers increase spending), AND the government is monetizing the deficit (creating money and then spending it into circulation), then that has a multiplying effect. That's a double velocity increase x mass of money increase = a squared-effect and that's why things just go nuts.

Japan is a great case in point. The great mass of Yen just sits there and does nothing. Basically, its Art Cashin's Trillion Dollar basement money. Not inflationary. Once the Japanese decide their money has become problematic, that mass will be multiplied by a higher velocity and then the wheels come off. But until people actually start to spend it, it won't matter how much they print.

I think about all these low level details because someday I want to develop a simulation and see if I can get a business cycle as an emergent property, kind of like Steve Keen has done, but - with a bit more of a wargame flavor to it. I need a staff, I really do.

Who said anything about gold? I've noticed you like to use the term 'goldbug' to throw discussions off on other paths when gold isn't even being discussed. It's a subtle attempt to disparage others that disagree with & mislead others.

Btw, I highly doubt involving gold in some new type of monetary system is going to be of much benefit.

Work is now over. I'm headed home & will go for a walk with my wife and dog. I recommend everyone get some sunlight and vitamin D. It can do wonders. Happy posting.

Alberta government will be issuing $1000 to $2000 per person affected by the FMac fires, so they can have money to buy a meal or a few groceries or replace a debit card or "cooked" plastic money. Many "savers" will be contributing to inflation and velocity by spending some of those hard earned dollars helping their neighbors in the north to get just enough to survive on their "new normal" (no home, perhaps no job and years of rebuilding for a very tenuous future in a very low margin industry). My impression is, however, that the majority of them are committed to persevere and will try to make a future by rebuilding an economy and functioning community.

Contrast this to a continuing civil conflict in the middle east where vastly more quantities of capital is being sequestered in arms and the destruction of lives and a way of life. Pick your disaster: environmental catastrophe or a man made one. You know who gains in the man made situations - those loaning money to both sides and collecting commissions and interest. I know where my savings will be spent. As for the government's actions, I get to decide at the next provincial election.

Aloha! Money is money and the money we have today is decreed by government and essentially backed by a military junta. No diff between what Obama and the US Treasury enforce and what Caesar enforced back in Rome. You can't go to Starbucks and buy a McMuffin with Canadian money or beads or barter whether gold or slaves! The POS exchange has to be "coin of the realm"! Decreed by law! You can sell your gold or your beads and take the US Dollars and buy the McMuffins. But who didn't know that?

My biggest concern is not about "what is money", but the "quality of money". When politics enters the equation then so does corruption. Here let me show you ...

I cut this out of the US Treasury Daily Statement and it shows for FY2016 Obama's Regime issued some $1.04TRIL in debt to date. There are four months left in this fiscal year so I am sure there is more debt to be issued. The following is just for one day at the US Treasury, May 5th.

Look at the bottom line called "Net Change" and see the far right corner ...

Now here is how much taxation the Obama Regime sucked out of the productive members of the US economy to date. See that in the right lower corner? It is $1.74TRIL.

If you add the taxes to the debt you get $2.744TRIL. The $1.04TRIL of debt is to be paid or not by future generations ... your kids and their kids. The income and corporate taxes are gone! They get scooped away every day, every week, every month and spent right away on various political agendas. Usually the agendas involve making government bigger and your paycheck smaller.

Now this is where that money goes. It goes to pay off insiders, lobbyists and to buy votes. It goes to a myriad of government agencies. You can see for May 5th some $108BIL went through the US Treasury and all those agencies. These funds are in the Federal Reserve Account. The USA is the only customer the US Fed has, supposedly. See below here.

Wow, look up there on the right ... $7.15TRIL ran through the US government coffers for FY to date, siphoned off to hundreds of agencies and millions of workers and dependents. That is a lot to keep track off in an accurate manner.

Do you really think government workers and their bosses and the US Congress can spend that $108BIL on May 5th wisely and prudently and without temptation of fraud or corruption? The money is there but there is no QC! Those who have been entrusted to spend that capital know they are spending other people's money, not their own. Is there a conflict of interest? Are politicians human? Most of the politicians can't even count past 100 without getting mixed up, yet they are handling $108BIL in one day. Do we trust the government programmers to make sure every dime is accounted for? Who audits the auditors?

Empire historically has little to do with efficiency and decency and a lot to do with fraud and corruption and hubris and narcissism. It is all just human nature!

If I understand correctly, there is something scary: To keep the wheel of economy and finance spinning, governments are swapping our savings by debt. As long as you don't claim your savings (spending) then things are stable for a long way.

Money is part of a complex system to exchange work for something else we need. Over the ages, this system got more and more complex.

I think complexity is part of our genes. We start things small and simple and progressively add complexity to them. Complexity is a function of: population size, resources and energy availability, quest for efficiency, quest for profit, etc... All systems humans build (social, economical, political, technological, etc...) are doomed to be more complex over time and eventually crashes. As someone wrote (was it on PP?): We are a cyclic animal, not an evolutionary one.

Many are losing their way here at PP.com.. thanks to DaveF. I can't believe the number of folks who up voted Dave in his discussion with DrYAM. This is the problem with having a banker shill as the resident Gold analyst, given a pulpit by the owners of this website. I only seek truth.. I care not what anyone thinks of me for what I say. Here is the truth as I see it;

Dryam is correct in his assertion that Dave is off his rocker here. Dave said,

Now then - if you wanted to back a currency, you could theoretically choose anything. Gold, land, sovereign debt, municipal debt, corporate debt - or you could choose equities.

Would you rather have (let's say) shares in AAPL, or the sovereign debt of Italy? Or Spain? Or Portugal? Or Non-performing loans from Italian banks? Or rotten subprime mortgage-backed securities?

Ultimately, what's wrong with having high quality equities on the balance sheets of our central bank/hedge funds? Say, just the dow 30? As a taxpayer, I'd almost prefer them over sovereign debt.

This is perverse (even though some central banks, namely Japan and Switzerland, are already doing it). First off, the idea of markets is that they price things based on supply vs. demand.. the stock market being no different. Does anyone other than myself (and DrYam I would suppose) intuitively grasp the fact that when central banks create thin air money in order to buy stocks whose value is denominated in said money, that they are essentially capturing that market. The "values" of the stocks are now in their control... and they are in a sense meaningless. That this might, "back" the money is simply describing a self-referential hall of mirrors.

This same game goes on in precious metals.. in a different way; between the Comex, and London markets, you have synthetic paper markets that are much bigger than the underlying physical trading markets, that are captured by the bankers who make the money. Here are two posts for those who want to get better educated as to how this works;

There is a very important concept that one needs to grasp to really understand money - I was first exposed to it in Vincent LaCascio's book, "The Monetary Elite vs Gold's honest discipline", and that is; scarcity integrity.

Now if the monetary masters of our system allowed for deflation to happen.. in other words they allowed the amount of money to wax and wane based on demand for debt... then our unbacked, debt-based money system could actually have a reasonable level of scarcity integrity.

But it doesn't.. when bankers get too powerful, using the money they create effortlessly to pervert everything and anyone in their way, they will always use their printing press to their own benefit.. to the furthering of their status quo. Scarcity integrity is what real physical Gold has.. and it's also what makes Bitcoin so successful (aside from the elegance of the Blockchain) ... QE is a perversion of the system.. it's a way to print money when none is being demanded. QE to buy sovereign debt is a perversion. QE to buy stocks is a further perversion, signaling the ultimate fusion of corporate and government interests... there's a name for it. There a bill for it to;

So, up vote away folks... I am sorry to see the discourse here going so far downhill. I am sorry to see how Dave has taken over the conversation and pulled the wool over so many eyes in this most important discussion about what money is, and what it should be. I am not going to come back here and argue with Dave.. like DrYam I am busy too.

Finally, if you want to understand where we are in the Gold story.. and I believe we are getting very close to the point where the captured, leveraged paper markets break down and the realization sets in for many who think they own Gold that they own only paper markers for Gold that are not redeemable... here is a wonderful guide;

I only seek truth.. I care not what anyone thinks of me for what I say.

I like that quote Jim. Here's a favorite of mine as well.

Mark Twain wrote:

In the beginning of a change the patriot is a scarce man, and brave, and hated and scorned. When his cause succeeds, the timid join him, for then it costs nothing to be a patriot. - Notebook, 1904

One of the interesting takeaways from Rowe this year was how many of the posters with masculine usernames turned out to be women. Doesn't matter how long you've known someone online, until you've met them in person...you really don't have a good idea who they are or where they are coming from.

Something relatively new that has been working for me...if we've never met in person, then I make a conscious effort not to allow that person to get under my skin...to stay detached when they start hitting emotional buttons.

Put another way, if I know you personally I'll put more out there.

If not, no point in getting stirred up. The person stirring the online pot could literally be anybody...

In my recent posts which seem to have really triggered you, I have been trying to explore the concept of a central bank-as-hedge-fund and its implications for prices going forward. My thought process started when I looked at the assets and liabilities of the Fed, really thought about what Chris said about the SNB, and then I thought about Armstrong's "private wave" where sovereign debt will be defaulted on, and then asked myself, as taxpayer, if I were forced to pay for the losses of this hedge fund, what would I prefer to have it holding? And as manager of the hedge fund responsible for the potential losses, what would I do?

Part of my problem is my thinking process (and where I want to end up) isn't clear sometimes when I'm starting out on a topic. I don't even know where I'm going. I just have questions in my head and I want to ask them. Now I think I'm getting clearer, so after agreeing with your central point, I'll do just that.

...when central banks create thin air money in order to buy stocks whose value is denominated in said money, that they are essentially capturing that market. The "values" of the stocks are now in their control... and they are in a sense meaningless. That this might, "back" the money is simply describing a self-referential hall of mirrors.

Yes. I totally agree. This we can clearly see happening in the case of the BOJ. They deliberately set out to own the JGB market, and so the price of those bonds is most definitely self-referential. Same thing to a lesser extent with the Fed and the Treasury market. That's a bad thing because the price signal is lost, and that's bad in a number of different and really important ways.

But that's not what I was talking about! Just to be very clear, I'm not advocating that the central banks buy equities (or other assets) with thin air money to keep the markets propped up! I think it is a terrible idea.

So back to my point. Let's assume we run the SNB. Because of the way central banks work, we are required to back the CHF by owning stuff - some of it being gold, other stuff being financial assets. What would we pick? Just perhaps - the dow 30 might be in the mix. And if our other option were sovereign bonds that we know are about to blow up...what action would we take? Buy more sov debt? Or buy something else?

In order to avoid moving the markets by our actions, we have to pick markets that are very deep. That means gold is probably out (and also given we central bankers don't want gold to go nuts - gold is probably out for that reason too). That leaves equities.

What are the larger implications of this? A single central bank won't move markets by what it decides, but if they all decided to independently move more or less at the same time, what would that look like? And what would trigger such a move? If the safe EU sov debt was all trading at negative yields (and it is), what then?

I'm claiming that we may be seeing the start of this process right now. What we imagine is "central bank market propping" may be partly that, but it may also be partly something else too. If the EU really does explode, there are a lot more central bank reserve assets that currently own EU sovereign debt that will flee.

Net-net? Those expecting a stock market crash (currently including me, but I'm starting to waver) may well be faced with a flood of money coming from official and semi-official sources fleeing both JGBs and Euro sovereign debt right into equities. SNB's AAPL position may be warning us of exactly this.

So instead of laughing at the "clearly silly" behavior of the SNB, and assuming that equity-market price movements are all about market-propping behavior or sneaky futures-buying, we might ask ourselves, what might happen when the prospects of an EU breakup increase? Clearly they've crossed the equity ownership rubicon already...

Again, I'm about prices. My goal is not to be so entrenched in a world view so that I ignore what prices are actually saying because my belief system is screaming at me "the market must crash because the P/E values are too high."

And this place here can be a bit of an echo chamber in that regard. Stepping outside the lines of peak prosperity orthodoxy carries with it the usual penalty for different-thinking that carries back to playground days, and is enforced by playground-bully-activity.

Let me ask you the following (related) question: did name-calling behavior save any of us from the 4 year gold bear market?

If I understand correctly, there is something scary: To keep the wheel of economy and finance spinning, governments are swapping our savings by debt. As long as you don't claim your savings (spending) then things are stable for a long way.

Yeah that's it. We are now in a position now where the government deficit-spending of our savings contributes materially to economic activity. Without it, we get a wave of deflation and the economy tanks. I'm not advocating this, just describing what is.

At the same time, if we all decide we want to spend our savings, that ends up causing a wave of inflation. In some sense, the checks are only good if we (mostly) decide not to cash them.

We've become addicted to a built-in government deficit and/or a built-in growth in private debt. Steve Keen proved this with his spreadsheets. Any stepping-off this particular treadmill and society gets hit with a wave of deflation that tosses the current party right out of power. Humanity dearly loves to have a scapegoat.

But and as you said, humans seem to be cyclical beings by nature. Herd behavior writ large. And politicians all promise that they will somehow prevent the cycles from happening ("I'll make america great again") when the cycles themselves appear more or less written into our DNA.

Uncletommy-

I agree with all of what you said. Savings spent to rescue your neighbor in a bind is the right thing to do, even if it is inflationary, while savings spent to further destabilize some middle-eastern nation is counter productive in so many different ways. "When you find yourself in a deep hole, the first thing you must do: stop digging."

Yes! Banks print unbacked money out of thin air, then instantly get it backed by some real assets. (Its nice to have a banking license, isn't it? Its actually a license to print money...

dave,

you may want to re-consider what it is that you are calling money - if you can print it ad nauseum with little or no effort, then it's not money. real money stands for real labor, for real value.

i know there is a lot of mis-direction by the counterfeiters who call themselves "central bankers", but if we look back to the classic definition of good money put forth by aristotle, money has these properties:

durability

portability

divisibility

fungibility

scarcity

something that can be printed out of thin air is not scarce, and therefore not good money.

the US dollar is nothing more than an IOU note from a deadbeat uncle (uncle sam).

if you'd like to know more about the central bank counterfeiting scheme called "fiat", the renegade economist has this excellent short clip:

for a more in-depth review of the difference between money and currency, i recommend watching mike maloney's truly excellent hidden secrets of money series, here is episode 1 to get you started:

davefairtex wrote:

People like to say that fiat currency is unbacked. That's not true; each dollar of base money (Fed deposits and/or currency) is backed by a dollar of assets - usually sovereign debt

you're a funny guy, dave! you're trying to say that a promissory note (us dollar) is not unbacked, because it's backed by "sovereign debt", or, in other words, another promissory note?

i can understand how you might be confused on this topic.

it used to be that in the usa there were gold certificate and silver certificate dollars, that one could walk into a bank and exchange the then-backed dollars for gold or silver coins. well, those days are long gone, there is nothing currently backing the dollar, there is nothing set aside on deposit to trade dollars for, they are completely unbacked, except by promises from your good ol' deadbeat uncle sam.

convertibility of the dollar was ended in 1971 by "tricky dick" nixon, who lied and claimed he was "temporarily suspending" the dollar's convertibility to defend it against the evil speculators. of course, it was permanent not temporary, and the only thing he was defending, was america's profligate ways, america's exorbitant privelege, after being called out by charles degaulle of france.

the truth is, it was a default by the usa, it was a promise that was backed out of, and it's one of a long list of examples of why it would be unwise to trust the federal government or its promises.

davefairtex wrote:

I have the temerity to ask questions like, "hey, so what's wrong with central banks owning equities?"

wow, that's a great question, dave, and i have one for you as well:

hey, so what's wrong with the mafia buying up all the land and all the productive businesses in your town with cash that they earned through extortion, theft, counterfeiting, and racketeering?

you do understand that central banks are essentially a crime syndicate, extracting wealth from working people and funneling those funds to the top .01%, don't you?

you have heard of financial repression, i hope? here's investopedia's definition of it, in case you haven't:

chris did an excellent off-the-cuff podcast with john rubino a while back concerning financial repression and the central banks' war on savers, i highly recommend you give it a listen if you truly are interested in why it is a problem for the wealth of our society to be extracted by duplicitous means by the central bankers:

Yes, I'm familiar with all the history, and agree in large part - that is generally why my long term holdings are mostly "real things" (or derivatives of real things) rather than money.

And yet I am still stuck with my original question, which I find you did not answer. Given we remain in the current paradigm, if a central bank like the SNB is going to buy a financial asset to back its currency, should it buy a sovereign bond from Italy or a share of AAPL stock? Those Swiss are pretty conservative. What does it mean when they choose AAPL over German sovereign debt that has a negative yield? What would I do in their place? Would I approve if I were a Swiss citizen? And what does this mean for the future?

A lot of people get confused and mistake my questions and comments for advocacy or support for the system. I'm trying to explore both how things actually work, how the people in place running things might be thinking, and from that to suss out generally what might happen next.

So, where do you see things going next? What's the path of the buck over the next year? Will it tip over and sink relentlessly until it hits zero? (That prediction hasn't done so well in the past 3 years). If so - what happens to the USD when the EU implodes? And why? How about Japan? How about US equities? A mind-numbing crash, or is a spike higher possible if/when all that central bank money flees the Euro and runs for somewhere other than sovereign debt?

So, up vote away folks... I am sorry to see the discourse here going so far downhill. I am sorry to see how Dave has taken over the conversation and pulled the wool over so many eyes in this most important discussion about what money is, and what it should be.

I'm quickly learning that those who determine what money is and what it isn't don't care about my opinion (or indeed that of many others here). The system works for them, it allows them to rapidly generate vast amounts of capital and supercharge the economy which the underlying fundamentals can't possibly sustain. Were it my choice, I, like Jim, would elect something scarce to function as money, not only to store value, but to inhibit the reckless exploitation of our life support systems (forests, oceans, soil) and to limit the stress we put on ourselves (through debt needed to afford insane asset prices).

The point is; we don't get to decide what money is - for we are the unpeople. We don't even get to discuss what it should be in formal debates (i.e. UK parliament). The bankers tell us what it is - it is strictly their plaything.

I'm starting to think that is where the reform is going to come from - developing a monetary system that reflects the capacity of our immediate environment. In Edo Japan it was rice. Try printing that...

And yet I am still stuck with my original question, which I find you did not answer. Given we remain in the current paradigm, if a central bank like the SNB is going to buy a financial asset to back its currency, should it buy a sovereign bond from Italy or a share of AAPL stock? Those Swiss are pretty conservative. What does it mean when they choose AAPL over German sovereign debt that has a negative yield? What would I do in their place? Would I approve if I were a Swiss citizen? And what does this mean for the future?

Dave,

I don't have anything other than a gut reaction to your question. I don't like the idea, but I don't have any sure fired alternatives that are guaranteed to work. I have more questions than answers.

How much is too much? Which stocks should be bought and which ones should be avoided? What happens to the bank's balance sheet when the inevitable bear market arrives? If they make the wrong choices, who pays the consequences? Can connected insiders somehow profit from a CBs imminent (but unannounced) buy or sell decision?

If CBs were restricted to owning something like gold or silver, the demand for these PMs would rocket higher. As a result, miners would have incentive to ramp up production. It would cost more in energy and other resources while increasing the amount of pollution. For what - a lump of metal in a vault that wouldn't see the light of day??? That doesn't make much sense either.

Why does a CB have to invest in anything? The Federal Reserve pays for their functions and remits excess monies back to the Treasury. Why not allow them to print a small percentage of base money (unbacked by anything) to fund their operations? In fact, why not dispose of them completely and have the US government perform their necessary functions? Isn't that what happened before 1913 when the original act was signed?

Up to this point, all the questions were pretty much rhetorical. I'd like your insight into the following question: Is there anything the Federal Reserve does that can't be handled by the market?

Just sitting here at 9:13 EST in the midst of my first information blackout. Cox Cable is having some type of technical difficulty which began around 2:30 this afternoon. I first lost contact with my office when a call in proclaimed there was no service for our land line numbers. A call to my assistant's Verizon cell phone revealed that all internet was down also. Calls to Cox customer service were producing no answers as they were not picking up the phone. Needless to say all production came to a halt. Arriving home around 7:00 my wife informed me we had no landline service to the house. At 8:00 I sat down to watch the news and the cable television went out five minutes into the program. At 8:30 my grand-daughters informed me that the house internet had stopped working. Calls to family and neighbors revealed that numerous people had no phone service.

I have been able to get online with my Verizon MYFI (basically a cell phone dedicated to providing internet service.). No one seems to have a clear answer as to why outages are occurring in New York, Connecticut, Rhode Island and Massachusetts. Except for one news channel, the radio and television news were not even mentioning that there was an issue. The one channel reporting said that numerous police, fire, municipal and school district systems were out.. Time Warner in New York is having the same type of problem which they blamed on someone cutting a cable.

I learned a lesson about having back up systems today. Thankfully Cox only has our accounts for land based service. Our home and office cell phones are all Verizon which kept working and allowed me to stay in contact with employees and family.(as well as stay connected to the web).

If these systems can go down over several states for hours with no explanation I would say volatility is here.

with respect to the lack of selfish behavior in the face of personal danger and the generosity of the people of Northern Alberta, I would expect nothing else! This is oil country and these people are drillers and roughnecks and welders. You can critisize the upper management of some oil companies but the vast majority of oilfield workers have big hearts and will put their own neck on the line to help others. If i ever find myself in a desperate situation I hope I am on an oil community!

1) if you were running a developed-nation central bank, what would you have in the "reserve asset" column?

2) why not simply get rid of central banking entirely?

Hitting #1 first: reserve assets are a way of both "backing the currency" as well as having a way to remove currency from circulation if the need arises. We haven't talked about that for a very long time, but in the old days when we weren't at peak debt and banks would loan money to real people, having the ability to remove base money from the system was really important. The CB would sell off assets, taking base money out of circulation, which in tandem with reserve requirements (another limit from a dimly-recalled past) would result in fewer bank loans being made, which would cause an economic contraction.

So if we take as given we need a central bank, they must have reserve assets. Equities are problematic since valuation changes - but that's true of gold these days too. If we stick to the major companies, there is less concern. I'd rather have a big company equity on the books than shale driller junk debt, for instance.

And the gun really is to the central banker's heads right now. The choices are:

low yielding Spanish & Italian sovereign debt

negative rates on German (and other core-nation) debt

higher yielding US equities.

Wacky ECB policy has brought even the SNB to this decision point. SNB cannot simply put all their eggs in the US treasury basket. Right now 20Y US bonds yield 2.18%. AAPL yields 2.08%. Would you give your money to the US government for 20 years - and I mean, for real, not just as a trading sardine? No way in hell would I do that; I think the buck will scream higher in the next few years, but it won't be a durable move, certainly not lasting 20 years. And so if long rates jump by 2%, that's an (estimated) 30% loss to capital if for some reason you later need to bail out of that 20 year bond. AAPL starts to look reasonable given that situation.

Now for #2: do we need a central bank?

I'll make a simple if-then argument: if we don't have fractional reserve lending, then we don't need a central bank. If we do have fractional reserve lending, then we do need a central bank - specifically, a lender of last resort that can act to stop bank runs. The other "services" central banks provide are strictly optional. Lender of last resort is not optional.

The underlying question behind the fractional reserve lending choice is, do you want to have an economy where credit can expand if opportunity presents itself? Credit expansion of this sort is inflationary, but it also allows the economy to take advantage of opportunities. Without constructing a simulation, I don't know the specifics of the trade-off. I tend to think that humanity dearly loves a bubble, and fractional reserve lending definitely facilitates such things. At the same time, if you had a fixed money supply, and there was a big breakthrough in some new technology (say, power generation), the fixed money supply would limit the ability to deploy the new technology irrespective of the attractiveness of the business model. That, or literally all the money would get sucked out of every other part of the economy and thrown into the new area. No more farm or home loans because they simply don't have the same ROI as the fancy new windmills. "Sorry, we're simply out of money", the banks will say.

Likewise, if savers decided they wanted to reduce risk because the economy turned down, loans could easily become impossible to get. That's because in a non-fractional system, duration of savings deposit must match duration of loan or else you're back to needing that central bank again. There might just not be any savings at all in the longer-term CDs at some points in time.

Imagine that. Banks running out of money. Great if you are a saver, but what would that do to business investment, home construction, and the like? I think money gets a whole lot more expensive, but that's just my gut feeling.

Thanks for the reply. You read between the lines of my post. I agree that as long as we have fractional reserve banking, we need some sort of backup bank to keep their promises. I suppose if there were real consequences for banks getting into trouble (unlike in 2008,) I'd be more forgiving. The banks get a free pass to make money and a free backup when they fail. We, the public, get screwed both ways.

We've had a great ride for the last century that the Federal Reserve has been in existence. Sure, there have been some rough patches, but look at all the great ideas that got funded by all that instantly available money. While marveling at all the modern conveniences, look at all the problems that have tagged along as so much excess baggage. The problems accompanying our successes are large enough to destroy us. (I think we would get to this point regardless of the monetary system - just not as fast or completely.)

Realistically, the corruption in the system makes continuance of the system a foregone conclusion. Politicians are beholden to moneyed interests ... and the bankers always have money available to "invest" in future returns. Once a politician sucks from a banker's teat, the banker owns them. We're unlikely to fix the problems until the system fails.

So, after the system fails, will we rebuild a system exactly like this one? Probably not. Undoubtedly, there will be some components that will survive. If you were to set up a new banking system, what would you incorporate from the old system and what would you abandon? In other words, what do you like about the current system and what is abhorrent?

So here's my sense. Nations with elastic money seem to do better than those without. If the US decided to lose elastic money, our competitors would probably kick our butts. "Sorry, your credit card doesn't work anymore, we're out of money here at the bank." There are lot of unintended consequences to "no fractional reserve lending" I suspect.

The price we pay for elastic money is inflation. People should have the ability to protect themselves from this effect. If we allow gold to be a parallel currency (i.e. there's no tax on moving in and out of gold) then people can have a refuge during times of inflation, a floating gold standard with the free market dictating price.

Here's how I'd restructure the banking system:

Ownership structure: central bank is a publicly traded corporation. Nobody can own more than 5% of the shares. And perhaps retail banks cannot own the shares, nor anyone who owns a controlling interest in banks can own the shares. CB needs to be at arms length from their bank customer base, so they don't end up giving them any sweetheart deals. Shareholders elect (via cumulative voting) the directors of the company (i.e. today's FOMC). Perhaps government owns 20% of the equity, and is able to appoint one of the directors, so they have influence, but no control. Dividends are paid to the shareholders.

Mission: should be reset back to its 1914 roots. Central bank oversees printing of the currency, clearing services, and is the lender of last resort, and that's it. Its not a regulator, a setter of interest rates, a monetizer of sovereign debts, or a rescuer of economies. And lender of last resort doesn't mean bankers get a pass on stupid decisions. It just means that solvent banks that run into liquidity problems can get money when they need it in exchange for good assets so they don't go under unnecessarily. Insolvent banks still get taken down by the government regulator.

Reserves & Base Money: central bank should provide base money in exchange for gold and/or corporate debt. No sovereign debt. Reserve requirement fixed at 10:1. Base money should grow at a rate equal to GDP, but no more. This is the area where I'm less sure about how much authority to give the central bank. Control base money, and you control the inflation rate. Ideally I would have a feedback mechanism whereby the free market withdraws some amount base money from the system (say, into gold) when inflation starts to get too crazy, but that could be subject to abuse. This is my biggest question mark.

Books: central bank publishes their 10K like everyone else, and are audited like everyone else. Specific identity of banks provided liquidity are withheld, but the amounts provided are not.

There are issues of international trade finance that I havent thought about also.

Retail deposit insurance: I'm generally in favor, I like the FDIC, but it shouldn't be complete insurance, only partial - say 80% coverage - paid for by fees, backed by full faith & credit of the Treasury. Banks get this in exchange for being regulated. That way weak banks will still make people nervous, but nobody will get wiped out on a failure. And if banks want to provide more complete coverage, they can get it from private insurance companies. If the private insurance company revokes coverage, that's probably a bad sign for that bank.

Capital structure: savings-account depositors should be higher in the capital structure of the bank than unsecured creditors, but lower than secured creditors - a savings account owner is a semi-secured creditor. Checking-account deposits don't pay interest, and are at the very top of the food chain, above the secured creditors.

Trading: banks cannot engage in trading. All they can do is make loans and take deposits. Banks must retain all the loans they make. No more securitization. No more derivatives.

Postal Banking: basic government checking accounts. Accounts fully reserved at the central bank, no lending, limits on transaction count, low fees, no interest. Must be an actual person to have this account. Its designed as a public banking utility service for poor people, who right now pay 20+ billion dollars in "gotcha" fees every year. Post offices exist nationwide. It will be the only bank with national reach. ATM withdrawls will be very low, or free. Its a "safety net" program disguised as a bank.

Deposit diffusion: no retail bank should own more than 5% of total national deposits. This reduces bank influence on the national stage. Banks may be important regionally, but won't be important nationally.

Ultimately, I'd rather have a (regulated, diffuse group of) private organizations overseeing money than the government. I believe in the power of the free market, as long as it doesn't become a cartel that controls the levers of power. Keeping them individually small keeps power diffuse. Try getting 20 CEOs to agree on something.

Allowing politicians to control, or even influence money supply seems problematic to say the least. "Here's a tool to keep you in power, at the expense of potentially creating massive inflation. Have fun!"

Also perhaps allow for local forms of money. Why not let people experiment? They wont be FDIC insured. You could even have gold-money, since gold will remain a parallel currency and it will no longer be taxed.

These are my initial thoughts. Its really a mix of banking post Glass-Stegall, with a deliberately partial FDIC, a postal bank, a rollback of Fed powers back to 1914, mostly-private (and non-bank) ownership of the Fed, and a Fed perpetual transparency requirement.

You touched on what I'd be hoping for in a new monetary system after the Big Reset. I don't want to have to rely on those who run "the system" to do the right thing AND I don't want to have to rely on the regulators to actually regulate. I want the new system to have a way for people to OPT OUT any time we see or believe the system is beginning to work against us. Nothing would seem easier to design and implement than for the new design to allow gold and silver to function as unregulated (market driven) parallel currencies. That would give those in power some wiggle room (eg. Adjusting money supply up or down) but they could only distort things so far before people started opting out by converting digital and paper currency into gold and and silver (or vice versa). After all, if they're legitimately running the system for the benefit of all they should not be intimidated by the people's ability to move freely (without regulations or taxes) back and forth between currency and money (gold and silver). Some day I'd love to go shopping and see every item priced in dollars, gold and silver (buyer's choice). I guess I'm describing a free market for money!!

As in the matrix, we are the ultimate energy source that powers this (or another) system. Unfortunately, the opt-out option, as sexy and desirable as it sounds, will never be an option freely available in any system. We have to take it without asking permission.

Realistically, given that I see big and sudden changes mostly as passing the torch to some other crooks, my strategy would apply at the individual level.

- Do what I have to do within the legal limits.

- Reduce my dependency to the system as much as I can (Total independence is impossible - as soon as you own some land, then you become part of the system).

Doable, not easy, but highly rewarding.

Another strategy, is to finely analyze and understand the system and use it for our own benefit without forgetting who we are.

These two strategies can be seen on PP member's posts. And their writings are very interesting.

Realistically, given that I see big and sudden changes mostly as passing the torch to some other crooks, my strategy would apply at the individual level.

So as a practical matter I agree with you; that's the sort of thing that has happened in the past. Even though we got rid of explicit physical slavery, it transitioned to a new and different form; now most of us are in debt slavery, or slavery of another more mental/emotional kind.

That said, I am starting to think it might be important to have a vision of where we'd like to get to. At some level I'm an optimist. Incredible as it may sound, it is possible that someday, one of us will be in a position to influence an important outcome. You just never know. And if at that moment our fortunate someone doesn't have any positive idea where to take things and instead is only looking to strap on his own personal parachute, it will be a missed opportunity. Its difficult to lead the parade in a compelling way when you are constantly eyeing the escape routes. And if you believe in the plan yourself, it will be a lot easier to explain it to others.

Most people (me included, until Grover asked me that question - and even then I had to explicitly bend things away from the negative) have no idea of what sort of system they'd like to see in place. They just focus on the bad stuff they don't want to see - natural enough, that's how our parents trained us. What does Abraham Hicks say about that?

Since I'm not them, I'll paraphrase. On an energetic level, if you have a clear vision of where you want things to go, it is more likely for that vision to be created. If you have no vision at all, you just take what comes. If you focus instead on what you don't like, then - paradoxically - that's what you tend to end up helping to create. "That which you put your energy and attention on grows stronger."

I'm not saying we engage in self-delusion, but having a clear vision of where we want things to move towards can be a very powerful thing.

i agree totally with what you wrote. We need people that have a vision to move things toward the good side. I just think I am not this person. I also have sometimes the tendency to "complain a lot", and it takes me a lot of energy to look the other way: how to get out of the mess; focusing a lot on the solutions instead of (too much) on the causes; doing, doing and doing.

Incredible as it may sound, it is possible that someday, one of us will be in a position to influence an important outcome.

Already happened with good results (I put aside the political hijacking): Buddah, Moise, Jesus and Mohammed.

And also with terrible results: Hitler,

Yes, someone someday will will be in a position to influence an important outcome. If everyone act at his level, stay honest and be not naive, then, reaching a critical mass will certainly help find the good leader. If the entire society stays too passive, then I don't see how things can change for the better.